Negative equity props up home prices in toughest markets
The negative equity problem may actually be pushing up home prices at the bottom of some of the hardest-hit housing markets, according to a report from CoreLogic.
The national supply of unsold homes dropped to 6.5 months in April from nine months last June. But the decline occurred less because of an increase in sales. In fact, pending home sales dropped 5.5% in April, according to the National Association of REALTORS.
Instead, fewer homes reached the market because the owners owe more on their mortgage than the home is worth and are trapped in negative equity, said CoreLogic Senior Economist Sam Khater in the report.
More than 11 million borrowers are underwater, according to CoreLogic.
"Negative equity is typically a demand-side obstacle to sales and refinances, but currently is also restricting the supply of homes for sale," Khater said.
In markets where more than half of borrowers are underwater, the average supply drops to 4.7 months, compared to 8.3 months in healthier areas.
As a result of the restricted supply, lower-priced homes in these areas are actually rebounding at their fastest pace since the homebuyer tax-credit "boom" in 2010, according to CoreLogic.
Prices on less expensive homes increased an average 4.5% from one year ago, compared to just a 0.6% uptick at the higher end of the market (click on graph below to expand).
"Paradoxically, as the flow of REOs has slowed over the last 18 months, negative equity has become a positive force in real estate markets by restricting supply in the face of increasing demand," Khater said. "We have transitioned from pricing dynamics driven by economic weakness and high shares of distressed sales to one of restricted supply, which will likely exist for some time to come."